1. Introduction

German law distinguishes between companies limited by partnerships and companies limited by shares.

Sources of law are the general rules on partnership, which are codified in Sec. 705 to 740 Bürgerliches Gesetzbuch (BGB/ Civil Code) and the Handelsgesetzbuch (HGB/ Commercial Code), where mercantile partnerships are laid down. Further, specific types of business organizations are governed by individual laws, e.g. the GmbHG (Act concerning Companies with Limited Liability) or the AktG (Stock Corporation Act).

2. Companies limited by partnerships

Mainly, there exist three different legal forms of partnerships in the German legal system, which are commonly used. Namely, there is the Civil-Law Association (Gesellschaft bürgerlichen Rechts/GbR), the General Partnership (Offene Handelsgesellschaft/OHG) and the Limited Partnership (Kommanditgesellschaft/KG).

Those three common forms are completed by the Dormant Partnership and the Private Foundation.

Generally, the partnerships have in common, that the partner remains in full control one the one hand, but is fully liable on the other. An exception from this rule is the KG.

2.1 Gesellschaft bürgerlichen Rechts (GbR)

According to recent case-law the GbR (Civil-Law organization) is considered to be a legal entity and is able to sue and be sued. It is often used for single joint ventures (e.g. construction projects) and comes to an end when the joint project has been completed.

Advantages

Simple incorporation proceedings

No mandatory share capital

No accounting mandatory in small businesses.

The trade tax has an allowable deduction of 24.500 €

To consider

Full personal responsibility for company debts

The GbR has no (registered) company name, but it is possible to call the company ARGE (business name)

2.1.1Special Form: ARGE for construction project (joint ventures)

Advantages

The lose connection of different companies is ideal for the demands of a construction project

Higher creditworthiness due to the expanded pool of liable companies

Easy invoicing between the companies

To consider

Full liability for all companies

Complicated accounting and taxation

2.2 Offene Handelsgesellschaft (OHG)

The OHG (general partnership) consists of two or more natural or legal entities merged in order to establish a commercial enterprise. It is a partnership in which partners share equally in both responsibility and liability.

Advantages

No mandatory share capital

High creditworthiness

Every shareholder is able to represent the company on his own

This company structure is suitable for even partners

Company name

The trade tax has an allowable deduction of 24.500 €

To consider

Full personal responsibility for company debts

Incorporation proceedings are more complicated

Mandatory accounting

2.3 Kommanditgesellschaft (KG)

While in the OHG all partners are fully liable, the KG (limited partnership) differs between unlimited liable general partners (Komplementär) and limited partners (Kommanditist). Their liability is restricted to their fixed contributions ( to the partnership, which are registered at the registry courts. Although the partnership itself is not a legal entity, it may acquire rights and incur liabilities, acquire title to real estate and sue or be sued.

Advantages

The limited partners liability is limited to his contribution

Contributions may be made in money or asset values

The KG carries a company name

No regulation by law which limit the administration of the business

The trade tax has an allowable deduction of 24.500 €

To consider

The general partners are fully liable

The salary of the limited partner cannot be deducted for tax benefits

Incorporation proceedings are more complicated

2.3.1Special Form (GmbH & Co. KG)

The GmbH & Co. KG is a limited partnership with, in most cases, the sole general partner being a limited liability company. This company structure combines the advantages of a partnership with the limited liability of a company limited by shares. Those advantages make this company type especially suitable for transactions concerning real estate. In those cases the GmbH is the owner of the real estate and is sold to the purchaser.

Advantanges

Since the liable general partner is a limited liability company, the liability of the shareholders of the GmbH is restricted to the share capital respectively the contribution (KG)

Higher flexibility to extend the capital resources by accommodating new limited partners

Easier succession as in a KG

Less employee participation as in a GmbH

Lowers risks in real estate transactions

To consider

Complicated accounting and taxation, since it has to be done for both, the KG and the GmbH. The Effort can be reduced by certain measures

Lower creditworthiness

The salary of the limited partner cannot be deducted for tax benefits

3.Companies limited by shares

There are two major company structures of companies limited by shares.

The public company limited by shares is called Aktiengesellschaft (AG) what can be translated as stock cooperation. The most common private company limited by shares is the GmbH (acronym for company with limited liability). Those two structures can be regarded as the primary company forms in Germany.

3.1 Gesellschaft mit beschränkter Haftung (GmbH)

The GmbH (company with limited liability) is the most common type of legal entity in Germany, Austria and Switzerland. The main advantage of this structure in comparison to the general partnership is the limited liability.

The process of incorporating a GmbH is dived into three stages. In the first stage the founding of the association takes places. At this point of time the company is regarded as a private partnership with full liability of the founding partners. After the company is founded but not registered the company gains certain limitation on its liability. At this time it is often styled as GmbH i.G. (i.G. standing for in founding stages). Finally the Company becomes a full GmbH after registration. From that time on, the liability is restricted to the limit of the company’s share capital.

Advantages

Separation from private assets

No personal responsibility for company debts

One single person is sufficient to set up a GmbH

The shareholders might be directors at the same time. This brings tax advantages

Nearly no restrictions regarding the person of the shareholder (also foreign natural persons and legal entities)

The shareholders can be other companies like the KG, OHG or another GmbH

The retirement of shareholders doesn’t affect the company in their external representation

The company’s succession can be managed easily

Further tax advantages are possible

To consider

High costs for incorporation proceedings (1.000 to 2.000 €)

The founding act and the articles of association have to be notarized.

Before registration no limitation of liability

For limitation the company’s name must include GmbH or mbH

The amount of the share capital has to be at least 25.000 €

The share capital cannot be withdrawn from the company (a withdrawal might lead to criminal prosecution)

Complicated accounting and taxation

Corporate tax has to be paid partly in advance. This might lead to shortage of needed liquidity

An annual statement is required within 6 month

A full balance sheet is required

The balance sheet has to be filed at the Registry Court

The Company has to file for bankruptcy as soon as a debt overload is reached. Filing bankruptcy while being already illiquid might lead to criminal prosecution.

Closing proceedings are complicated

3.1.1Special Form: Unternehmergesellschaft (UG [haftungsbeschränkt])

The Unternehmergesellschaft (haftungsbeschränkt) ‘entrepreneurial company (limited liability)’ is a company structure that came into existence in 2008. The German legislative introduced this new form in order to set an alternative to the increasingly common English Ltd.

The structure is based on the regular GmbH but with a few different rules and requirements. Most important, the UG is less complicated to set up and has a share capital requirement of only 1 € in the beginning.

Advantages

Minimum required capital is 1 €

Shares can be split down to shares of 1 €

Simplified incorporation proceedings

Lower incorporation expenses in comparison to a GmbH

Faster incorporation

Change to GmbH is possible, as soon as there is a share capital of 25.000 €

Easy transfer of shares to new shareholders

To consider

25% of the annual profit has to be saved as reserve assets until the capital amount reaches 25.000 €

The company name must include the words limited liability. e.g.: XCompany UG (haftungsbeschränkt)

In general, the number of shareholders is limited to 3

Each shareholder is obliged to file for bankruptcy individually.

3.2 Aktiengesellschaft (AG)

The AG (joint stock cooperation) is limited by shares, which are commonly owned by shareholders an may be traded on a stock market.

The structure consists of a management board and a supervisory board. The management board runs the business. The supervisory board controls the actions and decides about the removal of members of the managing board. It further determines their compensations. The supervisory board itself is controlled by the single shareholders.

The incorporation proceedings of an AG are complicated and connected to high costs. E.g. the amount of the share capital has to be at least 50.000 € divided into shares. In most cases, the AG is not most suitable company structure to start a business.